Since the AI boom this year, quarterly financial reports have been viewed as a "quarterly update" on the tech giants' preparations in the AI arena. This past Tuesday, Google and Microsoft's "report cards" were the exact opposite of the previous quarter: where Google led last time, Microsoft now takes the lead.
Overnight, both Microsoft and Google's parent company, Alphabet, released financial reports showing improvements in their core businesses for the quarter ending in September. However, their performances in the AI-related cloud business differed significantly, leading to divergent stock price movements post-report.
During the report period, Microsoft's "Intelligent Cloud" business, which includes Azure, GitHub, server products, enterprise, and cloud services, reported revenues of $24.3 billion, a 19% year-over-year increase, surpassing analysts' expectations of $23.61 billion.
Azure and other cloud services saw a revenue increase of 29%. Although this didn't match the first quarter's peak of 31%, it didn't continue to slow down to 27% like the previous quarter, exceeding analysts' expectations of 26%. Revenue from server products and cloud services grew by 21%, accelerating from the previous quarter's 17% growth rate.
On the other hand, Google exceeded revenue expectations for the report period, but its cloud computing growth was the slowest in eleven quarters. The quarterly revenue growth was 22.5%, down from 37.6% in the same period last year, 32% in the last quarter of the previous year, and 28% in both the first and second quarters of this year.
In response to the contrasting "report cards," the market reacted promptly: Microsoft's stock rose nearly 4% after-hours, while Google's fell by over 6%. In pre-market trading the next day, Google's stock declined by another 6%.
Subtle Shifts
Throughout the year, the AI "duel" between Microsoft and Google has been relentless. However, as of now, the two companies' attitudes towards AI have subtly diverged.
As Google mentioned in its previous quarter's conference call, it has been actively integrating AI into its existing product: search.
The issue is that Google Search's primary revenue source is advertising. But compared to advertising growth, investors are more focused on artificial intelligence. Meanwhile, Google Cloud hasn't benefited much from the rollout of various AI-driven services.
In this quarter's conference call, Google CEO Sundar Pichai stated that the search engine remains Google's primary business. The previously launched chatbot, Bard, is just an "early experiment and supplementary experience" for the search engine.
In contrast, Microsoft's strength lies in the fact that most of its current business revenue comes from selling software and cloud services to enterprises. Enterprises tend to pay for technology sooner, as these technologies can help automate everything from coding and spreadsheet analysis to PowerPoint creation.
On Tuesday, Microsoft revealed that over a million users have paid for its AI-embedded Copilot feature. This tool will be fully available next month, so the market expects Microsoft's revenue to surge further.
This distinction was also evident in the remarks of the two CEOs during their conference calls. Microsoft CEO Satya Nadella spent a significant portion of the initial minutes of the call detailing various ways customers use Microsoft's AI. In contrast, Sundar Pichai simply mentioned that there's definitely a strong interest in AI.
Additionally, Pichai acknowledged challenges customers face in cloud spending, indicating that not only has Google's cloud computing division not benefited from AI, but it's also incurring losses.
Microsoft CFO Amy Hood also mentioned that cloud computing customers have become more cautious in their spending. She stated that the cost of investing in AI infrastructure has impacted the cloud business's gross margin for the quarter. However, she also said that AI consumption is expected to continue growing in the upcoming quarters. The cost is a small price to pay to maintain a leading position in what she described as the "most exciting new tech product in recent years."
